Exercise 2 - Should High Noon Ranch harvest wheat or graze it out?
Determine the expected increase (or decrease) in net income expected if some or all of the
Cann’s 150 acres of wheat are grazed out rather than harvested. The High Noon Ranch fall
budgets for planning purposes are included. Keep in mind that the focus of a partial budget is
only on expenses and income that will change.
Problem 1.
If calves are pulled off wheat, a 20 bushel per acre wheat yield (drought reduced the anticipated
yield from the normal 30 bu. yield to 20 bu.) is anticipated to be sold for $2.70 per bushel after
being harvested by custom operators. The Canns have 75 stockers on wheat currently. Calves
were purchased in October at 400 pounds for $98 per hundredweight. Calves are expected to
gain on average 2 pounds per day until sale in early March (120 days of grazing total). If sold
then, they are expected to weigh 640 pounds on average and bring $92 per hundredweight.
These calves could also be retained for grazing out wheat (an additional 60 days of grazing
gaining 2.5 pounds per day). If sold after grazing out wheat, these calves are expected to weigh
790 pounds and sell for $83 per hundredweight (no additional death losses are anticipated).
Additional costs of $6 per head are expected for vet and medicine, higher marketing and
hauling costs if the calves are retained for grazeout; the interest charge will be 10 percent for
two months on the revenue that would have been earned if the stockers had been sold (0.10 x
2/12 x 640 lbs. x $.92/lb). In a normal year under the Cann’s plan, 75 acres of wheat would
be grazed out by these stockers (1 head per acre).
Use the wheat pasture and stocker budgets for 1999.
Questions:
a. Should the Canns sell their stockers now (March) or hold them to graze out wheat?
Calculate the expected change in returns on a per head basis if wheat is grazed out.
Partial Budget Form
Situation:
Additional Costs
Additional Returns
Reduced Returns
Reduced Costs
Total annual additional
costs and reduced returns
Total annual additional
(A) returns and reduced costs
Net change in income (B - A)
(B)
(A)
b. What are expected returns per head for graze-out stockers compared to winter-grazing
stockers under different gain and price scenarios? Complete the table below to determine the
sensitivity of the net change in income to price and gain assumptions.
Net Change in Income for Graze-out Stockers versus Winter-Grazing Stockers (per head)
Steer price
Average daily gain for
graze-out period (60 days)
2.25 lbs/day
$0.79/lb.
$0.83/lb
$0.87/lb
2.5 lbs/day
2.75 lbs/day
c. What other factors might affect whether or not stockers should be purchased for graze-out
and how many stockers are purchased for graze-out?
Problem 2.
In some years, the Canns buy an additional 75 head of stockers for wheat grazeout which are
then turned out on bluestem. However, a dry or wet year can impact the expected income.
They can buy 400 pound stockers for $112 per hundredweight in March. In a normal year,
they expect them to gain 2.5 pounds per head per day for 60 days on wheat. The stockers are
then moved to bluestem pasture where they will gain 2 pounds per day for 60 days. They
expect to sell them mid-July at 670 pounds for $98 per hundredweight. They expect a 2%
death loss.
Use the stocker budget for Feb. 2000.
Questions:
a. Should the Canns buy additional stockers? Why or why not? Use the budget worksheet
below.
Partial Budget Form
Situation:
Additional Costs
Additional Returns
Reduced Returns
Reduced Costs
Total annual additional
costs and reduced returns
Total annual additional
(A) returns and reduced costs
-
(B)
(A)
Net change in income (B - A)
b. What is the anticipated income to this wheat/stocker/bluestem enterprise if it turns out dry
and they don’t get the gain they expected? What if pastures are lush and they get better than
expected gains? Complete the following table to summarize expected outcomes.
Scenario
Assumptions
Dry spring/early summer
Gain 1.8 lbs/day over entire grazing period
(120 days). Sell at 616 pounds for $92.5 per
hundredweight.
Gain 2.5 lbs/day on wheat (60 days), 2 lbs/day
on bluestem (60 days). Sell at 670 pounds for
$90 per hundredweight.
Gain 2.5 pounds per day over entire grazing
period (120 days). Sell at 700 pounds for $88.5
per hundredweight.
Normal year
Wet spring/early summer
Click here for the Answers to Exercise 2
Expected Net
Change in Income